COMMENT: The implication of market mechanisms of the Paris Agreement for developing countries’ emission reduction targets

Published 08:50 on May 25, 2023  /  Last updated at 20:56 on May 25, 2023  / Mark Tilly /  Africa, Americas, Asia Pacific, EMEA, International, Other APAC, Other Content, Paris Article 6, South & Central  /  No Comments

We are seeing a growing trend of developing countries becoming more interested in participating in Article 6.2 cooperative approaches to generate ITMOs from climate activities. but it is vital to make sure that developing countries fully understand the implications of Article 6 on NDC implementation, writes Temuulen Murum of IGES.

By Temuulen Murun, Researcher, Climate and Energy area, IGES

Countries need to update and enhance their NDCs every five years to achieve the long-term goal of the Paris Agreement. Article 6 market mechanisms under the PA allow countries to utilise internationally transferred mitigation outcomes (ITMOs) toward their NDC targets (UNFCCC, 2015). We are seeing a growing trend of developing countries becoming more interested in participating in Article 6.2 cooperative approaches to generate ITMOs from climate activities. This mechanism aims to raise ambitions in mitigation and adaptation actions to achieve NDC targets and increase further emission reductions beyond the NDCs. However, it is vital to make sure that developing countries fully understand the implications of Article 6 on NDC implementation.

The final rulebook of Article 6.2 was adopted at COP26 (UNFCCC, 2021) and further the guidance on operationalisation was adopted at COP 27 in Sharm El Sheikh (UNFCCC, 2022a). Along with the adopted rulebook and guidance, it is now time to implement Article 6.2 approaches. However, in developing countries there are technical and institutional gaps in understanding with regards to Article 6.2. Therefore, it is important to emphasise participation requirements in Article 6.2, its impacts on NDC achievement and how developing countries can engage with it.

  • How do countries benefit from Article 6.2?

Through Article 6.2 cooperative approaches, some countries (e.g., Republic of Korea, Japan, Switzerland, Singapore) are planning to acquire ITMOs from developing countries to achieve their emission targets by 2030. This is because for those countries domestic climate actions alone would not be sufficient to reach NDCs targets. For developing countries, Article 6.2 would bring financial flows and technical support to develop climate actions that would be difficult to implement without such international assistance.

  • What is the trend among countries to participate in Article 6?

Many countries are interested in participating in Article 6 mechanisms. As can be seen in Figure 1, more than 70 percent of countries have mentioned in their NDCs that they intend to use or will use one of these approaches to achieve NDC implementation (UNFCCC, 2022b). Some countries directly referred to the general use of voluntary cooperation under Article 6 and/or use of cooperative approaches under Article 6.2.

Figure 1. Countries indicating in NDCs the intention to use any type of market mechanisms. Source: UNFCCC, 2022b

  • Are developing countries ready to participate?

Even though there is growing interest in Article 6 approaches, many developing countries are requesting capacity building support from the international community. A recent survey by the UNFCCC Secretariat office (UNFCCC, 2022c) showed that countries need support to gain a better understanding of COP 26 decisions and outcomes from negotiations relating to Article 6, and ranked it as the highest priority. Other priorities related to capacity building are development of domestic institutional arrangements, as well as ensuring that developing countries fully participate in cooperative approaches. This could imply that developing countries still have a rather low level of understanding when it comes to the Article 6 guidance and they have yet to achieve sufficient readiness to fully put the guidance to use.

  • What are the requirements for Article 6 participation?

The COP 26 decision lists six participation requirements for countries who wish to utilise Article 6.2 cooperative approaches to achieve their NDCs. Some requirements relevant to ITMOs are as below (UNFCCC, 20211):

  • To establish domestic arrangements for authorisation of the use of ITMOs,
  • To develop arrangements (e.g., registry systems) for tracking ITMOs

Authorising the use of ITMOs for another country’s NDC implementation means that the transferring country acknowledges that they will apply corresponding adjustments (CAs) to avoid double counting of emission reductions. Figure 2 shows the basic concept of CAs with the assumption that both transferring and acquiring countries have a single year NDC target in 2030 (Murun, T. and Hattori, T. 2022). Applying CAs means that the quantity of ITMOs would be added to the transferring country’s emissions, while the same amount of ITMOs would be subtracted from acquiring countries’ emissions (Figure 2). The methods of CAs (e.g., average or trajectory methods) would depend on the NDC types (e.g., single year or multiyear target). Therefore, transferring countries (e.g., host countries) need to understand the above participation requirements and analyse the implications of Article 6 in their NDC implementation.

Basic concept of the average method of CAs. Source: Murun, T. and Hattori, T. 2022

  • How should developing countries engage in Article 6.2?

In order to fully utilise Article 6.2, transferring countries need to develop policies and strategies on Article 6 participation and engagement. This should align with a country’s NDC implementation plan and should also support its sustainable development goals (SDGs). National policies related to Article 6 should cover the development of domestic institutional arrangements (e.g. authorisation, registry systems, validation and verification processes) and identify potential activities, sectors, and technologies that would enable the transferring countries to meet NDC targets (World bank, 2021; Carbon limits, 2020).

Aligning with NDC roadmaps requires countries to identify and analyse hard-to-abate sectors within NDCs roadmaps as these often need additional financial and technical supports from the international community. This would need in-depth technical assessment, consultation, and coordination with line ministries and agencies involved with NDC implementation plans.  To assess mitigation options for Article 6 feasibility, one of the practical tools is to utilise the marginal abatement cost curve (Carbon limits, 2020). Furthermore, most importantly, the activities supported through Article 6 mechanisms cannot be implemented without additional financial and technical support. Developing countries need to assess financial, technical, and policy analyses to identify potential mitigation actions that are additional in the country. The projects and climate actions under Article 6 should be additional to aim for higher hanging fruits, rather than supporting common practices.

  • What support is available for developing countries?

There are not many developing countries that have sufficient capacity to fully understand Article 6 mechanisms, which means it is difficult for them to develop national policies with detailed cost assessment and establish the necessary infrastructure. Therefore, capacity building is key for those countries to actively engage and participate in the successful utilisation of Article 6.2. To this end, the Article 6 capacity building work programme was launched at COP27 to support developing countries (UNFCCC, 2022d). Also, other organisations and countries have started activities related to Article 6 capacity building to enhance developing countries’ understanding, support domestic arrangements, and increase their technical skills (UNDP, World Bank, MOEJ, GGGI, IGES).

These programmes and activities can be used to enhance capacity by integrating them to fit each country’s national circumstances as each activity has its own purpose and different goals.  Support providers also should consider the needs of each developing country in terms of its NDC implementation and other priorities for sustainable development.